Why Japanese and Chinese Stocks Are Diverging and How to Play Them Here

Japanese and Chinese equities have started moving in opposite directions again, breaking a recent “seesaw” where inflows into one market often come with outflows from the other. The divergence shows up in exchange-traded funds: the iShares MSCI Japan ETF (EWJ) and iShares China Large-Cap ETF (FXI) have recently separated, with FXI lagging by more than 20% over the past 12 months before trading at a steep price-earnings discount to EWJ. The article links the gap to policy divergence—Bank of Japan shifting away from ultra-loose policy and unwinding yield curve control, versus China’s PBOC easing and targeted stimulus. It also cites capital-rotation dynamics after 2022, when Japanese governance reforms lifted Japan valuations while Chinese stocks sold off.